Trusts are an excellent way to manage your tax and protect your personal assets. However, choosing the right type of trust is crucial when implementing a trust structure. There are two main trust structures: unit trusts and discretionary trusts. While they have similarities, understanding their differences is critical when deciding which type of trust is the best fit. This article will set out the key differences between discretionary and unit trusts.
What is a Trust?
A trust is a legal relationship where the trustee (the trust manager) holds assets and property on behalf of the beneficiaries (the parties to the trust who benefit from the trust assets). The trustee is responsible for administering the trust and distributing trust assets to the beneficiaries in accordance with the trust deed (the trust’s governing document and rule book).
How Long Does a Trust Last?
The trust deed determines how long the trust lasts. This is usually for 80 years – but the maximum time period may vary between states and territories.
Trusts may also terminate before their expiry date. This is referred to as vesting. Commonly, the trustee provides notice in writing to the beneficiaries when the trust’s intended purpose has ended. For instance, the trust may have sold its property and distributed them to its beneficiaries and therefore has no remaining assets.
Continue reading this article below the formWhat is a Discretionary Trust?
This is a type of trust where the trustee has the discretion to decide which beneficiaries receive which trust assets and when. Discretionary trusts are, therefore, more flexible than their unit counterparts.
You may hear discretionary trusts referred to as “family trusts” because they are useful in estate planning to keep assets within the family and maximise investment income. The trustee can spread income and capital among family members as the trustee sees fit. This, in turn, grants the family members various tax benefits.
How Do You Set Up a Discretionary Trust?
A settlor, the person that creates a trust, follows four main steps. They:
- choose the trustee(s) and obtain their consent to act as trustee;
- draft the Trust Deed, which sets out the policies and procedures of the trust;
- settle the trust, which requires the settlor to make a small gift into the trust (usually $10); and
- execute the trust deed along with the trustee.
At this stage, the trust is now established. However, there are a couple of additional administrative requirements, including:
- stamping the trust, which is a formal registration requirement in NSW and VIC, the stamp duty of which is $500 and $200, respectively — in NSW, this must be done within 3 months of the trust’s creation;
- applying for an ABN and TFN for the trust, which can be done through the Australian Business Register; and
- opening a bank account.
What is a Unit Trust?
A unit trust is a fixed trust where the trustee holds the trust assets for the benefit of unitholders in fixed proportions. This means the trustee does not have the same discretion in distributing trust assets as a discretionary trust. Instead, the Trust Deed specifies the number of units in the trust each beneficiary holds, which translates to the value of the trust assets they are entitled. There may be multiple classes of units on offer with different rights for each class.
Settlors often use unit trusts, such as investment vehicles, when they require a degree of certainty. For example, if you have two unitholders who each own 50% of the units, the settlor is certain that each will receive 50% of the distribution.
Unitholders are the main people or entities that benefit from the trust and can be individuals or companies. They are quite often corporate trustees of various family discretionary trusts.
Unitholders should carefully consider the tax, stamp duty and estate planning implications of the trust structure and the trustee’s decisions. The unitholder or trustee must seek accounting and tax advice on these matters.
Key Takeaways
There are key differences between discretionary and unit trusts that are important to consider before making any business decisions. These differences concern the:
- trust establishment process;
- daily running of the trust; and
- tax considerations.
You should seek advice about the implications of holding particular assets in a trust. If you have any questions about the most appropriate trust structure for your circumstances, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A discretionary trust entitles the trustees to exercise their decision-making powers as the trustees see fit when distributing trust assets to the beneficiaries.
A unit trust entitles the unit holder to a portion of the total value of the trust based on the portion of units held in the trust.
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